The unintended consequences of a pay-for-performance rule change. U.S. Department of Defense’s National Security Personnel System

• Pages: 654-671
• Published date: 13 August 2018
• Date: 13 August 2018
• DOI: https://doi.org/10.1108/IJPSM-09-2016-0147
• Author: Hyunkang Hur
• Subject Matter: Public policy & environmental management,Politics,Public adminstration & management

The unintended consequences

of a pay-for-performance

rule change

U.S. Department of Defense’s National

Security Personnel System

Hyunkang Hur

Department of Public Administration and Health Management,

School of Business, Indiana University Kokomo, Kokomo, Indiana, USA

Abstract

Purpose –The purpose of this paper is to estimate the impact of a pay-for-performance (PFP) rule change on

US Department of Defense (DoD) employees’job satisfaction by looking at changes in the DoD’s National

Security Personnel System.

Design/methodology/approach –The data forthe analysis are derived from the2002, 2004, 2006 and 2008

Federal Human CapitalSurvey. A difference-in-differences (DID) quasi-experimental methodologywas used to

examine the effectof a PFP rule change on DoD employee jobsatisfaction. The Department ofAir Force and

Navy are analyzed as a proxy for the DoD. This study also undertakes a subgroup analysis strategy to

understandthe effect of PFP systems on specificsubgroups (classified by gender,race and supervisory status).

Findings –This study’s results indicate that the overall effect of the introduction of a new PFP rule at DoD is a

decrease of approximately 7.9 percentage points in employee job satisfaction, which is a substantial negative effect.

In addition, this paper further finds that DoD’s PFP system has widened the gender gap injob satisfaction at DoD.

Originality/value –This study contributes to both the theoretical and the empirical understanding of PFP

systems and public employee work morale and attitudes.

Keywords Human resource management, Employee work attitudes, Pay-for-performance system

Paper type Research paper

More than a decade ago, with explicit congressional authorization enacted in 2003, the

Department of Defense (DoD) created the National Security Personnel System (NSPS) as a

unique pay scale attempting to more closely link employee pay to job performance

(Ginsberg,2008, 2009). It was implementedby DoD during the 2006 Fiscal Year (FY) (US Merit

Systems Protection Board, 2006, p. 15; Ginsberg, 2008, 2009). The hallmark features of the

proposed regulations contain significant changes in the processes used for addressing

employee grievances (adverse actions and appeals), conducting labor relations and, most

significantly, in adopting pay-for-performance (PFP) and performance appraisal systems

(US Federal Register, 2005; Haga et al., 2010, p. 211).A major goal of the proposed regulations

was to replace the traditional General Schedule (GS) classification and rating system with a

PFP system phasedin by 2010 (Rutzick, 2005). A fundamental motivation for this reform was

the notion that linking individual pay andperformance will lead to increased workeffort and

productivity (US Federal Register, 2005; US Congressional Budget Office, 2008; Perry and

Porter 1982). On the other hand, critics charge that performance-based pay systems have

several unintended, negative consequences for employee motivation and performance.

Commentators argue that the proposed PFP system would lower employee morale, increase

competition among employees and undermine teamwork and cooperation (US Federal

Register, 2005; Zeller, 2004; Ballenstedt, 2008).

A substantial body of research has failed to find consistent effects of PFP on employee

motivation, employee morale and performance (Ingraham, 1993; Kellough and Selden, 1997;

International Journal of Public

Sector Management

Vol. 31 No. 6, 2018

pp. 654-671

© Emerald PublishingLimited

0951-3558

DOI 10.1108/IJPSM-09-2016-0147

Received 15 September 2016

Revised 5 January 2017

14 March 2017

17 September 2017

Accepted 21 January 2018

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/0951-3558.htm

654

IJPSM

31,6

Kellough and Lu, 1993; Kellough and Nigro, 2002; Perry et al., 2009). In fact, the public

management literature does not seem to have uncovered any evidence that PFP schemes

significantly increase employee motivation or productivity (Brewer and Kellough, 2016;

Bowman, 2010; Jordan and Battaglio, 2014; Kellough and Lu, 1993). Unfortunately, the lack

of substantive experimental research on the effect of PFP systems on public employee work

morale and motivation has so far precluded rigorous causal inferences. This study aims to

fill this gap in the existing literature by presenting new analytical frameworks for analyzing

the effect of PFP on employee work morale under the DoD’s NSPS system. This study

focuses on employee job satisfaction because it is one of the most important indicators of

employee work morale and a good predictor of work motivation and performance

(Rainey, 2014). While the DoD implemented the NSPS program over ten years ago and it no

longer exists, implementation of a PFP scheme under DoD’s NSPS system created an

opportunity for a naturally occurring experiment that could significantly advance our

understanding of the effects of PFP.

Applying a difference-in-differences (DID) quasi-experimental research design to the

motivational premises on which merit pay is based, this study evaluates the reactions of DoD

employees to the PFP system of the NSPS. This study considers not only average effects on the

distribution of employee job satisfaction, but also looks at effects separately by gender, race

and supervisory status. This paper concludes with a discussion of results and suggestions.

Design of DoD’s NSPS

More than a decade ago, with explicit congressional authorization enacted in 2003, the DoD

created the NSPS as a unique pay scale attempting to more closely link employee pay to job

performance (Ginsberg, 2008, 2009). The PFP provisions of the NSPS were hailed as a means

of making DoD employees more responsive, flexible and effective (Ginsberg, 2008, 2009;

US Congressional Budget Office, 2008). The design of NSPS developed from inequities and

problems associated with the GS system, which serves as the federal government’s main

pay system and bases raises and promotions largely on an employee’s length of service.

Officials at DoD used the GS system to highlight what they perceived as shortcomings of the

federal personnel system. They argued that pay levels and pay raises do not sufficiently

distinguish between better government workers and their lower-performing counterparts,

discouraging the former group and making them more difficult to retain (US Congressional

Budget Office, 2008, p. 2). Specifically, one important weakness of the current pay setting

system for GS employees is its inability to vary pay adjustments within its classification

system. Current regulations regarding pay mandate that annual pay adjustments be applied

across the entire GS classification system, regardless of variation in comparability estimates

for particular occupations or grade levels (Llorens and Rush, 2011, p. 4). The drafters of the

NSPS legislation sought to eliminate the dysfunctions of the original system. Relief from the

GS program first appeared in a bill introduced on June 2, 2003 by Senator Susan Collins,

who proposed the National Security Personnel System Act. That bill was not passed.

Another bill that addressed DoD personnel, however, H.R. 1588, the National Defense

Authorization Act (NDAA) for FY 2004, set definitions and provided guidelines for

a new DoD personnel system. The Senate passed the bill on June 4, 2003. President

George W. Bush signed the legislation on November 24, 2003, as P.L. 108-136 (117 Stat. 1392)

(Ginsberg, 2008, pp. 3-4). NSPS was finally authorized by the 2004 NDAA, implemented in

April 2006, and repealed by Congress in the 2009 NDAA. About 211,000 non-bargaining

unit DoD employees had been converted to NSPS in two “Spirals”[1] or implementation

phases by October 2009 when conversion to NSPS was halted (Ginsberg, 2009, p. 5; Schay

and Fisher, 2013, p. 360).

There is one noteworthydifference between the NSPS andthe previous DoD’s civil service

system. In the GS system, a substantial portion of annual pay increases is provided to all

655

Unintended

consequences

of a PFP rule

change